Note 13 – Derivative Instruments

Foreign operations give rise to market risks from changes in foreign currency exchange rates. Foreign currency forward exchange contracts with established financial institutions are utilized to hedge a portion of that risk. Interest rate swap agreements are used to reduce the impact of changes in interest rates on certain debt. The Company’s foreign currency forward exchange contracts and interest rate swap agreements are designated as cash flow hedges, and therefore the effective portion of unrealized gains and losses is recorded in accumulated other comprehensive income or loss.

At November 30, 2018 exchange rates, forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros; the purchase of Mexican Pesos and the sale of U.S. Dollars; and for the purchase of U.S. Dollars and the sale of Saudi Riyals aggregated to $139.8 million. The fair value of the contracts is included on the Consolidated Balance Sheets as Accounts payable and accrued liabilities when there is a loss, or as Accounts receivable, net when there is a gain. As the contracts mature at various dates through March 2021, any such gain or loss remaining will be recognized in manufacturing revenue or cost of revenue along with the related transactions. In the event that the underlying transaction does not occur or does not occur in the period designated at the inception of the hedge, the amount classified in accumulated other comprehensive loss would be reclassified to the results of operations in Interest and foreign exchange at the time of occurrence. At November 30, 2018 exchange rates, approximately $2.4 million would be reclassified to revenue or cost of revenue in the next year.

At November 30, 2018, an interest rate swap agreement maturing in September 2023 had a notional amount of $112.5 million. The fair value of the contract is included on the Consolidated Balance Sheets in Accounts payable and accrued liabilities when there is a loss, or in Accounts receivable, net when there is a gain. As interest expense on the underlying debt is recognized, amounts corresponding to the interest rate swap are reclassified from Accumulated other comprehensive loss and charged or credited to interest expense. At November 30, 2018 interest rates, approximately $0.8 million would be reclassified to interest expense in the next year.

Fair Values of Derivative Instruments


	Asset Derivatives					Liability Derivatives
		November 30, 2018		August 31, 2018			November 30, 2018		August 31, 2018
(In thousands)	Balance sheet location	Fair Value		Fair Value		Balance sheet location	Fair Value		Fair Value
Derivatives designated as hedging instruments
Foreign forward exchange contracts	Accounts receivable, net	$	755	$	700	Accounts payable and accrued liabilities	$	1,857	$	1,211
Interest rate swap contracts	Accounts receivable, net		—		781	Accounts payable and accrued liabilities		790		1

		$	755	$	1,481		$	2,647	$	1,212


Derivatives not designated as hedging instruments
Foreign forward exchange contracts	Accounts receivable, net	$	144	$	76	Accounts payable and accrued liabilities	$	46	$	354
Interest rate swap contracts	Accounts receivable, net		—		—	Accounts payable and accrued liabilities		105		—

		$	144	$	76		$	151	$	354

The Effect of Derivative Instruments on the Statements of Income


Derivatives in cash flow hedging relationships	Location of gain (loss) recognized in income on derivatives	Gain (loss) recognized in income on derivatives three months ended November 30,
		2018		2017
Foreign forward exchange contract	Interest and foreign exchange	$	380	$	380
Interest rate swap contracts	Interest and foreign exchange		—		(17	)

		$	380	$	363


Derivatives in cash flow hedging relationships	Gain (loss) recognized in OCI on derivatives (effective portion) three months ended November 30,						Location of gain (loss) reclassified from accumulated OCI into income	Gain (loss) reclassified from accumulated OCI into income (effective portion) three months ended November 30,						Location of gain (loss) on derivative (ineffective portion and amount excluded from effectiveness testing)	Gain (loss) recognized on derivative (ineffective portion and amount excluded from effectiveness testing) three months ended November 30,
	2018			2017				2018			2017				2018			2017
Foreign forward exchange contracts	$	72		$	730		Revenue	$	(256	)	$	710		Revenue	$	262		$	56
Foreign forward exchange contracts		(1,495	)		(354	)	Cost of revenue		(232	)		(199	)	Cost of revenue		389			82
Interest rate swap contracts		(1,773	)		771		Interest and foreign exchange		(144	)		(167	)	Interest and foreign exchange		(47	)		—

	$	(3,196	)	$	1,147			$	(632	)	$	344			$	604		$	138